Consultation paper Draft guidelines on MiFID II product governance requirements (ESMA/2016/1436)

The Swedish Investment Fund Association organizes fund companies in Sweden and represent approximately 90 percent of assets under management on the Swedish market. Swedish fund management companies are, as far as fund management is concerned, not directly regulated by MiFID II but the funds are almost exclusively sold through distribution channels where the directive is applicable. This being said we would also like to stress that the UCITS legislation and the UCITS KIID is a guarantee for investor protection and a thorough product governance regime.

The comments made below relate to the indirect application on fund management of the MiFID II rules on product governance. However, we would also like to urge ESMA to further develop the guidance in two areas that affect the distributors directly: Firstly discretionary portfolio management is a MiFID service that should not be regarded as a product. The product governance requirements must be appropriately adapted to fit such services if they are to be applied on them. Secondly the distinction between the target market definitions and the suitability and appropriateness test still needs further guidance.  

Q1: Do you agree on the list of categories that manufactures should use as a basis

for defining the target market for their products? If not, please explain what

changes should be made to the list and why.

The Swedish Investment Fund Association generally agrees that the six categories are relevant. However, when applying the categories to UCITS funds it is apparent that the simple character of (non-structured) UCITS funds would result in a fairly simple target market definition. The same is true for retail AIF’s. For example, UCITS funds are sold to the mass retail market, no previous knowledge or experience is required by investors, but they must be aware that they can both gain on the investment or lose money. All UCITS are provided together with a risk calculation in their KIID. Most UCITS funds can be used for a number of objectives and needs.

We welcome that the guidelines allow for flexibility for manufacturers and would like to stress that such flexibility is essential for the proper functioning of the rules.

When explaining the risk tolerance categories ESMA has mentioned that the risk indicator stipulated by the PRIIPs regulation should also be applicable. Firstly we would like to stress that ESMA must accept the risk indicator stipulated by the UCITS KIID regulation as well, which will be relevant at least until 2019. Secondly we suggest that the risk indicator should be sufficient to explain the risk tolerance the client must have. The risk indicators of the key information initiatives are standardized and well known by regulators and the industry.

The categories “objectives” and “needs” are difficult to separate and we propose that they are treated as one category. Producing a detailed description about the objectives and needs of a certain product is not feasible for the manufacturer. For example, many funds have special policies relating to sustainable investments. Their policies might exclude investments into coal, tobacco or controversial weapons. To pinpoint such funds as targeting only investors who need “green” or “ethical investment”, or whose objectives is a nonsmoking world would be far too narrow. Such funds might target a much wider group of investors seeking a balanced and responsible investment for long term growth.

Q2: Do you agree with the approach proposed in paragraphs 18-20 of the draft

guidelines on how to take the products’ nature into account? If not, please

explain what changes should be made and why.

We are aware that there are a multitude of products more complex than traditional UCITS funds and that the rules must work for all different kinds of products. Even so we would urge ESMA to keep the simpler products in mind in order to maintain their non-complex profile, and refrain from forcing product manufacturers into complicated or lengthy target market descriptions. We appreciate that ESMA acknowledges that the target market will be identified with less detail for simpler products but we miss the explicit mentioning of UCITS products in this regard. We assume that categorization as non-complex according to Article 25.4 of MiFID II can be used to identify products that “would be compatible with the needs and characteristics of mass retail market” as expressed in recital 18 of the delegated directive. We would also appreciate more examples related to UCITS funds.

Q3: Do you agree with the proposed method for the identification of the target market

by the distributor?

Under this section The Swedish Investment Fund Association would like to address the discussion about distribution strategy. Since the manufacturer does not know the end clients, or the groups of clients the distributor will attract, the possibility for the manufacturer to make sure that the distribution strategy is compatible with the target market is limited to qualified suggestions. The manufacturer could for example propose the types of investment service through which the client could acquire the product but it would not be possible to provide details about the communication channel (on-line, telephone etc), or design of the acquisition channel (see paragraph 22 of the draft guidelines). Such detailed decisions must be left to the distributor since most UCITS are intended for the broad mass market of retail clients.

Q4: Do you agree with the suggested approach on hedging and portfolio

diversification aspects? If not, please explain what changes should be made and


It is essential that the target market definition does not prevent portfolio diversification and hedging. We welcome that ESMA has acknowledged this and opens up for permissible deviations at the individual point of sale.

However, we would also like ESMA to acknowledge that since this will result in permissible deviations, the frequency cannot be questioned. The current wording of the text seems to imply that even though it is allowed and sometimes even necessary to deviate from the target market, this would not be allowed unless it is a limited occurrence. This creates an impossible ambiguity which will mean serious problems when giving advice or building diversified portfolios.

We would also like the guidelines to allow for the creation of portfolio solutions that fulfill the need of a certain category of clients without the specification of one particular individual client. Such portfolios consist of different investment products as building blocks. Creating such portfolios requires diversification through the inclusion of both low and high risk alternatives where the manufacturer´s target market of the different products might not match.

The distributor should not be limited only to the target market set by the manufacturer but should be able to set a target market that fit the client base of the distributor (see paragraphs 32-35 of the draft guidelines). To this end the target market of the distributor can either be more restricted than the target market of the manufacturer or wider. This is necessary since the manufacturer cannot foresee all possible applications of a certain product when it is created, especially since they do not know the end client.

Q5: Do you believe further guidance is needed on how distributors should apply

product governance requirements for products manufactured by entities falling

outside the scope of MiFID II?

The Swedish Investment Fund Association welcomes the statement by ESMA that information disclosed in compliance with the UCITS directive is relevant. However, the statement is not clear as it only says that such information maybe acceptable (paragraph 52 of the guidelines). We would like to stress that such information must be acceptable as it is produced to meet regulatory requirements and consumer needs. The UCITS KIID should also be mentioned.

Q6: Do you agree with the proposed approach for the identification of the ‘negative’

target market?

We do not fully understand the application of the negative target market for simpler non-complex products such as UCITS funds. UCITS must be available to the public (Article 1(2)(a) of the UCITS Directive). It would not even be consistent with basic principles for fund management to specify a group to whom the products should not be sold. We would like ESMA to provide examples of a negative target market for UCITS funds.

Q7: Do you agree with this treatment of professional clients and eligible

counterparties in the wholesale market?

No comments

Q8: Do you have any further comment or input on the draft guidelines?

It is not fully clear whether the target market assessment should be made public and if so where such information should be provided to the investors. The Swedish Investment Fund Association would suggest that for a UCITS fund the information could be included in the prospectus, or on a website.


Q9: What level of resources (financial and other) would be required to implement and

comply with the Guidelines (market researches, organisational, IT costs, training

costs, staff costs, etc., differentiated between one off and ongoing costs)? If

possible please specify the respective costs/resources separately for the

assessment of suitability and related policies and procedures, the

implementation of a diversity policy and the guidelines regarding induction and

training. When answering this question, please also provide information about

the size, internal organisation and the nature, scale and complexity of the

activities of your institution, where relevant.                                              

Even though a target market assessment is already made in many cases it is not performed with the same amount of detail as ESMA suggests. The administrative burden depends on what is expected of the UCITS funds and so far it is still unclear what kind of information the distributors must require from the fund management companies.


Swedish Investment Fund Association